To help you prepare for the rigors of exam day, Wiley has prepared a 6-page cheat sheet with step-by-step instructions for answering ten typical Level II exam questions including foreign exchange, investments in financial assets, binomial interest rate trees, full and partial goodwill methods, periodic pension cost and more!
Which of the following is least likely if a parent uses the full goodwill method as opposed to the partial goodwill method to account for an acquisition?
A. Return on assets and return on equity will be lower under the full goodwill method.
B. Net income and shareholders’ equity are the same under both methods.
C. The net profit margin will be the same under both methods.
(B) is the correct answer. Total assets and total equity are higher under the full goodwill method; hence, ROE and ROA are lower. Net income and retained earnings are the same under both methods, but total shareholders’ equity is higher under the full goodwill method. The income statement is the same under both.
TIP: Do not read the question too fast; pay attention to what the question is specifically asking (least vs. most likely, etc.) and watch out for tricky distractors. FRA also includes employee compensation, multinational operations and builds upon Level I financial reporting quality and financial statement techniques. The following questions highlight some “must know” concepts from employee compensation and multinational operations.